Good day, and thank you for standing by. Welcome to Radian Group's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to John Damian, Senior Vice President, Investor Relations and Corporate Development.

Thank you, and welcome to Radian's second quarter 2023 conference call. Our press release, which contains Radian's financial results for the quarter was issued yesterday evening and is posted to the Investors section of our website at www.radian.com. This press release includes certain non-GAAP measures that may be discussed during today's call, including adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity. In addition, specifically for our Home Genius segment, other non-GAAP measures in our press release that may be discussed today include adjusted gross profit and adjusted pretax operating income or loss before allocated corporate operating expenses. A complete description of all of our non-GAAP measures may be found in press release Exhibit F and reconciliations of these measures to the most comparable GAAP measures may be found in press release Exhibit G. These exhibits are on the Investors section of our website. Today, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Sumita Pandit, Chief Financial Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage. Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2022 Form 10-K and subsequent reports filed with the SEC. These are also available on our website. Now I'd like to turn the call over to Rick.

Good afternoon, and thank you all for joining us today. I am pleased to report another solid quarter for Radian. GAAP revenues grew year-over-year to $290 million. We generated net income of $146 million. Our annualized return on equity was 14.1% in the second quarter. Book value per share increased 12% year-over-year to $26.51. We paid a $35 million dividend to stockholders, reflecting the highest yielding dividend in the industry and our overall liquidity and capital positions remained very strong, which I will cover in a few minutes. Despite continued headwinds in the mortgage and real estate markets and continuing macroeconomic uncertainty, our overall performance in the second quarter reflects the resilience of our business model, the strength of our growing insured portfolio, the depth of our customer relationships and the commitment of our team. Our team remains focused across our 3 areas of strategic value creation, growing the economic value and future earnings of our mortgage insurance portfolio, positioning our homegenius business on a path to profitability and value creation and prudently managing our capital resources. In terms of growing the economic value of future earnings of our mortgage insurance portfolio, we continue to leverage our proprietary analytics and radar rates platform focused on driving economic value while calibrating our dynamic risk-based pricing to capitalize on the opportunities that we see in the current market. As a result, we wrote $16.9 billion of high-quality mortgage insurance business in the second quarter of 2023. And we expect to see continued opportunity to put our capital to work at attractive risk-adjusted returns. Our primary mortgage insurance in force, which is the main driver of future earnings for our company, grew 5% year-over-year to $267 billion. As a reminder, during our Investor Day in June, we provided examples of the potential future…

Thank you, Rick. Good afternoon, everyone. I'm pleased to provide additional details about our second quarter results, which reflect another strong quarter of performance, highlighted by the continued growth of our high-quality mortgage insurance in force portfolio as well as by the strength and flexibility of our capital and liquidity positions. As reported last night, in the second quarter of 2023, we earned GAAP net income of $146 million or $0.91 per diluted share compared to $0.98 per diluted share in the first quarter. Adjusted diluted net operating income per share for the quarter was also $0.91 compared to $0.98 per share in the first quarter as reflected in the reconciliations provided in Exhibit G of our press release. We produced a 14.1% annualized return on equity for the quarter and grew our book value per share 12% year-over-year to $26.51 as of June 30. First, let's discuss our revenue and related drivers. Despite the challenging macroeconomic environment, we generated $290 million in total revenues during the second quarter compared to $311 million in the first quarter. Our total revenues and net premiums earned in the second quarter were reduced by a onetime increase in seeded premiums earned of $21 million under our insurance-linked note program. This was due to tender offers by certain Eagle reissuers during the period to purchase the notes that supported their reinsurance agreements with Radian Guaranty. We are very pleased with the tender offer results, particularly since these transactions were no longer providing the level of PMIERs capital benefit to Radian Guaranty that they provided in prior years. Based on current projections and expectations, we expect Radian Guaranty to save approximately $58 million of future ceded premiums over time as a result of these tenders including a full recovery of the $21 million of the…

Thank you, Sumita. Before we open the call to your questions, I want to highlight that we are pleased with our results and remain focused on executing our strategic plans. We are driving operational excellence across our businesses and aligning our overall expense structure and resources to reflect the market environment. Our $267 billion mortgage insurance portfolio is highly valuable and is expected to deliver significant earnings going forward. We continue to strategically manage capital by maintaining strong holding company liquidity and PMIERs cushion while expecting to continue to pay ordinary dividends from Radian Guaranty to Radian Group, opportunistically repurchasing shares and paying the highest yielding dividend in the industry to stockholders. And finally, I want to recognize our team for helping to drive our strong results and for the outstanding work they do every day. And now, operator, we would be happy to take questions.

[Operator Instructions] And our first question comes from the line of Bose George with KBW.

I wanted to ask first just about share buybacks. You've obviously been somewhat quieter on that front the last couple of quarters. Just help us think about when we could see more activity there.

Thanks, Bose. This is Sumita here. It's nice to speak with all of you today. So I think both, we are taking a pretty deliberate and measured approach to how we think about our excess capital return given the uncertain economy as far as our share return in this year is concerned, in the first half of this year, we've returned about $90 million to shareholders, including dividends and share repurchases. We do have a strong track record of managing capital. As you know, we've returned about $1.75 billion of capital over the last 5 years. We've bought back approximately one-third of our outstanding shares in a similar time period. And we think that it is prudent for us to hold some excess capital today given the uncertain macroeconomic environment. I think if you look at our ROEs, they were a little lower in this quarter at 14.1%. Adjusted for the tender, that number would have been 15.7%, very, very comparable to our first quarter ROE and we think that as we go along, we will continue to take decisions on the optimum capital return to shareholders given this macroeconomic environment.

And then actually, I just wanted to clarify on your expense guidance. Does that include the OpEx, the cost of services and the policy acquisition costs? Or is it just the first 2 of those line items?

It's just the first two of those line items, the operating expense, the other operating expenses and the cost of services, which is the $380 million to $400 million guidance that we had previously given.

Our next question comes from the line of Doug Harter with Credit Suisse.

I believe in your prepared remarks, you talked about still being able to increase pricing during the quarter. I guess can you just talk about the pacing of price increases that you're seeing relative to some market expectations for improvement in improved economic outlook today versus 3 or 6 months ago?

Doug, it's Derek. So in terms of the market in Q2, I'd characterize it as very similar to Q1. I think I characterized it there as being a positive, disciplined and rational. So we continue to see a hardening market. So in our principal segment, the blackbox segment radar rates, we continue to see pricing increases in Q2. I would say the pace of the increase kind of came down a bit still increasing but not at the same pace we probably saw in Q4 of last year and Q1 of this year, but still kind of positive directionally.

And then it appears that your 2Q volume, you had a bigger sequential pickup than most of your peers. Is there any particular areas where you've spend, you were kind of winning more business? Or is it kind of broad-based?

Yes, kind of broad-based. It was really the pickup was in the radar rate segment. So that's where we really picked up. We were able to increase pricing across the board. And again, when we kind of see shifts in terms of volume, which we talked about at Investor Day, it's really going to be focused on what we find relative value and where we find kind of the highest economic value. So if you saw any movement with respect to credit mix is probably a little bit on the higher FICO where we saw relative value as kind of the driver.

Next question comes from Mihir Bhatia with Bank of America.

I wanted to first maybe just start with the reinsurance transaction. Just to clarify, the $21 million recovery you talked about, that's just from lower ceded premiums. Is that right? Or is there something else going on there?

Yes. So the $25 million was the ceded premiums that went up. So it's a contra revenue line. So think of it as our revenue went down by $21 million because of the transaction. And the $58 million that we expect to get a benefit for will be a savings in the future years. So that would be our ceded premiums going down in the future years by $58 million.

Right. And of that 50%, I think you said $21 million would be within the next year.

So we expect a cash breakeven within the next one year. So I think, in short, this is a really good NPV transaction for us, Mihir. And as we look at it, we are looking at our performance excluding the tender offer. And as we look at our numbers, I think our revenue would have been $25 million higher if we had not executed on the tender. Our net premium yield would have been 3.2 basis points higher. Our EPS would have been $0.10 higher, and our ROE would have been 160 basis points higher, excluding the impact of the tender. And because of this tender, we expect that we will actually have a higher future dividend capacity. So think about the $58 million that we have saved in future ceded premium that should help us increase our dividend capacity in future years.

And then I just wanted to ask about the 2018 deal. Like I recognize it's hit the delinquency trigger currently, but given it also is not providing a miles benefit. Would that be a candidate in the future or because it's hit the delinquency trigger, you basically are not likely to do that one?

So we do have a call option in November for this year for the 2018 one, and we will look at our options and take a decision on that.

And then maybe just asking about the paid claims, just switching to the business. In terms of the paid claims, they're running at a pretty low level relative to history. I think there was only 91 claims paid this quarter and 80 last quarter, which obviously is quite low. And my question is really, when does this normalize back to, I guess, the pre-pandemic pre-foreclosure levels or something more of a normal run rate level. Is there a cliff from a standing standpoint, just given the foreclosure programs expiring, et cetera? Just trying to understand what that glide path looks like and when we get back to what, I guess, would be a normal low environment?

Yes, I think it's a really good question. I wish I had future ball that I could look into and predict it, Mihir, it's really hard to predict the future, as you know. I think what we can say is that we are taking a conservative view about how we think about the macroeconomic scenario. Our performance till date has actually been consistently better than our expectations. But as you said, if you look at the average direct line that we've paid this quarter, it was about 36,400. And as you know, our severity assumptions that we use when we reserve for a new default is higher. It's about $60,000. So we are continuing to see consistently better performance than our expectations and we expect to continue to be conservative as we forecast our performance here. But Derek, and Rick, if you have other thoughts.

Yes, I'll jump in. So though it's tough to say. I mean, one of the phenomenons we had in the portfolio is just the embedded equity and so we've seen very high cure rates. So particularly in our pending claim kind of bucket, so a very unusually high level with in terms of that cure rate. And so that's certainly been a positive. If you look at kind of that default portfolio, if you take an index based approach over 80% has 20% or more equity. So until you kind of have a turnover in the portfolio that does put downward pressure in a positive way in terms of potential paid claims. So you probably need to see a significant turnover in the portfolio.

Yes. And we are really is kind of the law of small numbers right now, just kind of watching as this thing kind of evolves through the cycle. So I think as Sumita and Derek said, we're watching it carefully and I think being appropriately prudent about trying to factor in too much as we go forward.

And my last question, just -- Derek, just to follow up on the -- I understand it's an index-based portfolio approach that the 20% equity stat that you gave, like that 80% have over 20% equity, what would have been the rate like typically in, I don't know, 2015, 2017 around that pre-pandemic, I guess, what would be the typical equity rate in your pending [Indiscernible] portfolio.

Yes. I'm probably not going to -- I'm not going to guess on that lower, but I don't have a percentage off the top of my head in terms of kind of the embedded equity. But if you think about that, just looking at the run-up in home prices, kind of after that period of time, it would be significantly less. And so -- I can't think of any time in history where we would have had this much embedded equity in the default portfolio.

Maybe more of a normal amortization kind of embedded equity over time with small HPA compared to kind of 2021 ramp up in HPA. So I think the comparison is to Derek's point, probably two different scenarios.

[Operator Instructions] I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Rick Thornberry for any closing remarks.

Thank you, and thank you all. Appreciate you joining us today. Appreciate the questions and a good discussion. And most of all, appreciate your interest in Radian and the team here. We look forward to talking to each of you as -- in the coming months as we have an opportunity to and talk about how we're executing our business plans as we've laid out here. So have a great day, and look forward to talking to you soon. Thank you.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.